A gold medal – and a strange selection decision

It was 2012, and the UK was performing surprisingly well. But why had a star of the past been dropped?

It was hailed as a great success. The red carpet was rolled out. Foreigners came in their droves and went home feeling they’d been well treated by the host nation. Competition was tough but the UK was able to celebrate a highly successful outcome. Yes, you know what I’m talking about: investment in Britain’s regulated utilities.

Amid global volatility, the UK was seen by investors as a safe haven – and regulated assets as a safe haven within a safe haven.  The UK’s utility regulators were – on the whole – trusted. They had a long track record, having overseen many cycles (of pricing re-sets, for example) and there had been few negative shocks for investors.

No coincidence that a string of high-profile M&A deals arose. Between August 2011 and August 2012, we saw Cheung Kong Infrastructure’s (CKI) £2.4 billion (€2.7 billion; $3.9 billion) acquisition of Northumbrian Water and £645 million purchase of Wales and West Utilities; Morgan Stanley and InfraCapital’s £1.24 billion swoop for Veolia UK; and the taking of minority stakes in Thames Water by Abu Dhabi Investment Authority and China Investment Corporation – to name just a handful of examples.

Many such investments proved to be not just safe, but star performers. In a second-quarter results announcement, Canada’s Capstone Infrastructure revealed a “greater than expected contribution” from Bristol Water, in which it bought a 70 percent stake for $215 million in October 2011. In its first-half 2012 results, CKI revealed a 45 percent uplift in the value of its UK portfolio (the likes of Northumbrian Water and UK Power Networks) compared with the same period of the prior year – an outcome described by CKI as “outstanding”.

The UK had good reason not to shout too loud about its successes in this sphere. After all, a flag-waving general public may have quickly turned resentful if a feeling took hold that this success has been too much at their own expense. But, for having created a thriving sector for investment at a time of worldly woes, the UK deserved to step onto the podium and claim a gold medal.

This was not the whole story though. Cynics said the UK’s performance was not everything it could have been. They pointed, as an example, to the controversial selection of economic infrastructure. It was touted as a star of the show and funded to the hilt, but it didn’t deliver. Defenders of economic infrastructure said the expectations of immediate success were unrealistic, that it’s one to keep an eye on for the future – perhaps around 2024. The critics said that’s a long time to wait.

Alongside this, there was criticism that the Private Finance Initiative (PFI), a star of the past, was unceremoniously dumped this time around. Tainted by allegations of artificial performance enhancement, PFI was forced onto the sidelines. Many felt this was deeply unfair, not least because the evidence of alleged wrongdoing was disputed. The clamour for a future recall grew louder. But would the selectors listen?

*The September 2012 issue of Infrastructure Investor includes a 36-page UK Report, including a roundtable discussion with leading UK infrastructure investment and advisory professionals.